This week’s market update highlights the latest economic news and general market performance across the UK, US, EU and Asia.
The key takeaways:
🎢 US unemployment spikes spook markets – initial jobless claims surged to 249k, the highest level in nearly a year, pushing the unemployment rate to 4.3% and triggering the Sahm Rule Recession Indicator.
🤖 US tech weakens during earnings season – US tech giants are falling short of sky-high expectations, sparking concerns about the sustainability of their heavy AI investment.
⬆️ Bank of Japan hikes rates to 0.25% – in a rare move, Japan’s central bank raised the interest rate, it’s second raise since 2007 - also announcing plans to halve its bond buying program.
⛏️ Bank of England cuts rates to 5% – The MPC voted five-to-four to cut UK rates by 25bps, with markets anticipating a further 50bps of cuts this year.
🏦 US Fed signals a September easing - The Fed left interest rates unchanged, but Chair Powell suggests a September rate cut “could be on the table”, emphasising that the Committee would consider both the labour market and inflation data.
What does that mean for me and my clients?
The balance of risk seems to have shifted from inflation concerns to growth concerns. Frothier parts of the market are at risk of failing to meet expectations in a slowing economy, prompting a flight to safer assets that can provide protection, like government bonds and gold.
However, this tougher environment could provide an opportunity for active fund managers to shine. The quality of company earnings is likely to offer support during a slowdown. Assets that have struggled in recent years, such as fixed interest and smaller caps, could find relief if an easing cycle begins in the months ahead.
Chart of the week
Source: The Week in Charts - Charlie Bilello, July 2024
Why’s this worth sharing?
Small cap equities have often been a leading indicator for easing cycles, and this time is no different. The Russell 2000 has outperformed the S&P 500 by the largest margin ever over the 12 days leading up to the end of July.
Smaller companies typically tend to have a higher debt servicing burden, making them more sensitive to interest rate changes compared to larger companies. The continued progress in reducing inflation has boosted market confidence that interest rate cuts are on the horizon, to the relative benefit of smaller caps.
The Markets
US and AI slowdown fears: Global equities are tumbling after weaker US economic data. Disappointing earnings and guidance from US tech companies hit the Nasdaq hard, spreading to other regions and chip-related stocks.
Unwelcome cut for UK banks: The FTSE had a mixed week, not immune to global weakness. Banks in particular sold off in response to the base rate cut.
Mixed week for Hang Seng: Optimism from expected stimulus measures in China has faded due to weaker US economic indicators, impacting the Hang Seng.
Not so hot Topix: A stronger Yen, hitting its highest level since March against the dollar, has created a headwind for Japanese exporters and tourism. However, the Yen’s appreciation has offset equity weakness for UK investors.
Sticky Oil prices: Demand concerns have cancelled out fears of supply disruption, with tensions in the Middle East escalating following the assassination of Hamas leader, Ismail Haniyeh. Weaker manufacturing activity, particularly from top oil importer China, dampens the outlook for demand.
Going for Gold: The precious metal has taken pole position this week, benefitting the most from the rate cutting cycle, economic slowdown and geopolitical concerns.
| | Weekly Change | YtD Change |
|---|---|---|
| FTSE 100 | 0.05% | 9.58% |
| FTSE 250 | 0.50% | 11.12% |
| S&P 500 | 0.26% | 14.43% |
| NASDAQ | -0.09% | 12.39% |
| Hang Seng | 2.08% | 4.45% |
| Nikkei 225 | 4.05% | 6.66% |
| Brent Crude | 1.60% | 3.91% |
| Gold Spot | 4.18% | 18.87% |
| UK 10yr GILT | -22bps | +35bps |
| US 10yr Treasury | -25bps | +7bps |
Source: FE FundInfo, figures as at close Thursday 1st August 2024.
Upcoming data releases:
- Monday 5th August – UK & US Services PMI
- Tuesday 6th August – UK BRC Retail Sales
- Wednesday 7th August – UK Halifax House Price Index
- Thursday 8th August – US Initial Jobless Claims
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
